Robert asks…
Ponzi scheme and hedge funds.. mutual funds etc?
My understand is that a Ponzi scheme is highly illegal because it takes money from new investors and uses that money as interest payment for past investors. So in actuality nothing is produced and money is being pushed around.
So for these funds whether it be a hedge fund or mutual fund or any sort of financial collaboration. People are taking either their own money or other peoples money and investing it. What they get back is more money. Isnt this similar to a ponzi scheme in that nothing is being produced? Shouldnt this then be illegal?
Justin answers:
Let’s assume this isn’t just trollery….
Your reputable investment fund is either:
a) Capitalizing something – For example, they are buying stocks or bonds. This provides the money to finance all the means of production of the goods and services we use. This is like a bank except that in almost all instances investment funds are farther down on the seniority totem pole than banks and thus deserve to be rewarded more than banks. If you think this activity ought to be illegal you think banks ought to be illegal too.
B) Taking on risk that someone else doesn’t want – For example, these funds bu lots of mortgage backed securities. These are mortgages originated by local banks that want to make their money originating and servicing mortgages, not taking on interest rate and pre-payment risk. The advent of mortgage backed securities has contributed enormously to the well-being of banks in the US. If you think this produces nothing and ought to be illegal you think insurance companies produce nothing and ought to be illegal.
C) Providing liquidity in capital markets – When the corn farner wants to hedge price risk in futures markets he can be pretty certain of getting good pricing at narrow spreads due to investment companies trading corn futures. Futures markets have contributed enormously to proper allocation of capital and production free from price risk.
Joseph asks…
Has the American economy become the mother of all ponzi schemes?
The fed has lowered interest rates to 0. They have also been active in the bond market buying debt and mortgages to force interest rates down. They have been printing money. Traders at the CME are now suspicious that the latest stock market surge was the result of the feds pouring money into stocks. Isn’t the best way to describe the American economy, is to call it a gigantic ponzi scheme?
http://www.marketwatch.com/story/fund-flows-firm-suggests-government-bought-stocks-2010-01-05
Justin answers:
Yes it is. The Federal Reserve has to be ended if America wants a viable economy again. It’s not a conspiracy theory. Inflation = indirect theft of your purchasing power.
William asks…
in the 1920’s there was get rich quick schemes does anyone know any?
hi i hope u can help me i would really like the help im in the 11th grade and we are doing a report i have looked and looked the only thing that i find is the stock market and that isn’t enough..
Justin answers:
Ponzi scheme – it was about the value of international postage in different countries
Mark asks…
What are your thoughts on this?
NEW YORK (Reuters) – Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion “Ponzi scheme” in what may rank among the biggest fraud cases ever.
The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.
Madoff told senior employees of his firm on Wednesday that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme,” with estimated investor losses of about $50 billion, according to the U.S. Attorney’s criminal complaint against him.
A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.
On Thursday, two agents for the U.S. Federal Bureau of Investigation entered Madoff’s New York apartment.
“There is no innocent explanation,” Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he “paid investors with money that wasn’t there,” according to the complaint.
The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history. When former energy trading giant Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.
U.S. prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million
Justin answers:
Take him out back and hang ’em
Daniel asks…
Which Retirement Benefits Are Better for a 2008 Retiree: S&P 500: $407,735 or Social Security $147,736?
$407,735 for a mere median wage earner if Social Security had been privatized over the last 40 years and every cent of FICA tax equivalent was invested in the stock market (even after the 2008 plunge).
OR
$147,736 for a median wage earner under the Social Security System.
Now, what’s the argument against private accounts and getting rid of this pathetic Ponzi Scheme?
As you can see, the Liberals aren’t very good at simple math. That’s why they don’t know that surface temperatures haven’t risen of fallen in a statistically signficant way in the last 15 years, anywhere on earth.
Justin answers:
Anything but Social Security. That is as Ponzi scheme and is broke right now. It’s amazing to hear the Democrats talk about a “means test” for social security like it is a welfare payment when people pay into it expecting to get social security in retirement. If that happens, watch all retirement monies be cashed in and everyone in retirement programs stop all contributions. Why save if you neighbor can spend everything and get social security and you get none? Also…anywhere you see gray haired people will close…..restaurants, hotels, casinos. Most retirees spend their social security and boost the economy.
James asks…
Is our economy a giant ponzi scheme?
I am a 22 year old college student and to me our entire economy seems like one giant ponzi scheme. I know I am young and have much to learn which is why I am bringing this on here in hopes of input from much more experienced people in the field. But to me it just seems that my parents generation and this “american dream” of everyone buying a house since we have credit now was based off of money that never existed and at the expense of mine and future generations. I am currently taking a finance class and I do not agree with the class at all really. To me, these “future values” do not exist in the real world, only on paper, which is a major reason, in my opinion, for much of economic problems. You cannot possible calculate a future value many years in advance and be accurate. On paper the equations make sense, but in reality you cannot account for how the actions of people will impact the economy which is what the entire economy is made of, people. This to me, is why many people lost social security. I just feel like there are MAJOR problems with our economy being a ponzi scheme and also the economy being dependent on oil, but at the same time I feel I may be delusional because if this were entirely true wouldn’t there be much more commotion about it? Or is no one doing anything about it? Like I said I am young and have much to learn which is why I would appreciate input from someone who is much more experienced in this field and matter. Thank you.
Justin answers:
Uncertainty over future investment decisions is why Keynes wrote ‘The General Theory’. Today, we water down his thinking and come up with a number that indicates expected future investment, and act like the economy could be stable under investment uncertainty. It is the uncertainty that you write about that can make the stock market go crazy, leads to booms and busts, and the rest of it.
There are of course lots of other theories and factors that explain all this as well.
I would say the economy is not all a giant ponzi scheme, but there are positive and negative feedback loops caused by expectations and people buying simply hoping they can sell to someone else. These are more often referred to as ‘bubbles’. Certainly, the more financial the economy becomes, the more inequality of income, and the more bubbles we have. There are actually a lot of books on this topic at the bookstores now.
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